Time to revisit aged-care standout

In the weeks since the release of the federal budget, aged-care stocks have suffered a steep sell-off as investors fret over new government policies that cut funding in the sector. This provides an attractive entry point for one of the more conservative ­operators in this space.

Certainly, the market’s initial reaction is understandable given more than two-thirds of aged-care facilities’ revenues come from government funding (the remainder comes from accommodation charges and resident contributions).

However, fundamental industry drivers remain intact. The population of over 65s will more than double in the next 25 years, while the Australian population aged 85 and over is projected to double by 2032 and triple by 2045. Growth in demand for aged care services remains one of the strongest themes in the sharemarket.

The residential aged-care sector is highly fragmented with about 63 per cent of companies operating single facilities, 29 per cent between two and six facilities and just 8 per cent operating seven or more facilities. Consequently, the long-term opportunity for consolidation is immense. One particularly attractive stock is Japara Healthcare, which has fallen by 8 per cent since the budget.

Japara Healthcare is one of Australia’s largest enterprises in the aged-care and retirement industry. JHC owns and operates 43 aged-care facilities and four retirement complexes across Victoria, Queensland, South Australia, NSW and Tasmania.

In addition to operating revenues from resident fees and government-funded care facilities, JHC receives funding from “accommodation bonds”.

Accommodation bonds are in effect an interest-free source of capital funding. JHC can use this interest-free capital to expand its footprint. When projects are completed, sales of accommodation bonds to incoming residents more than recoup this outlay and the capital is thus recycled into subsequent opportunities.

At a market cap of $670 million and an existing footprint equating to about 2 per cent market share, the long-term growth runway for JHC is exceptional. Better yet, the company has a strong balance sheet, is a healthy generator of free cash, pays out a sound level of franked dividends (forecast dividend yield of 5.1 per cent) and is guided by a competent management team.

 

Read more at http://www.theaustralian.com.au/business/wealth/time-to-revisit-agedcare-standout/news-story/009cd2a0c82e058ae2e2fc72f81f7a0a

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